Are financial sanctions truly “smart”? Evidence from the perspective of cross‐border capital flows

Abstract

Few studies are found to examine the impact of financial sanctions on cross‐border capital flows. Using a panel data from 48 countries from 2000 to 2019, this paper aims to examine the impact of financial sanctions on the volatility of cross‐border capital flows. We employ difference‐in‐differences (DID) and spatial DID (SDID) models, showing the result that financial sanctions lead to an exacerbation of the volatility of cross‐border capital inflows and outflows in the targeted country, with the channel of negative impact on the financial sector in the targeted country. The subsample regressions indicate heterogeneous impacts of financial sanctions depending on economic structure and capital account openness. Additionally, the result of the SDID model shows that financial sanctions cause cross‐border transmission of financial risks, and that the spatial spillover effect of financial sanctions will also have negative economic impacts on other countries in addition to the target country. The significance of this study lies in emphasizing that international financial sanctions affect the economy of target countries through cross‐border capital flows. Meanwhile, we confirm that financial sanctions pose a certain threat to global financial stability.